Gold and equities are supposed to be non-correlated assets, right? The answer is actually a lot more complex, according to Permanent Portfolio Fund CEO and CIO Michael Cuggino.
Perception isn’t always reality, but gold is viewed as a safe haven and an inflation hedge, while stocks are seen as a bet on a better, more prosperous future. Nonetheless, when longtime skeptics like legendary investor Warren Buffett starts buying shares of gold miners like Barrick Gold, others take notice.
Both assets tend to enjoy long cycles. Stocks went sideways from 1966 to 1982, while gold, after the U.S. went off the gold standard in 1973, appreciated about 30-fold over the next eight years.
Cuggino notes that the last decade bears much resemblance to the 1990s, when at first most equities climbed in a rally that became increasingly narrow in breadth. Gold did little in that era and, depending on the time frame, often had a ten-year negative return.
But Cuggino explains there are brief periods when the two assets move almost in synchronization. Coming out of the Great Recession in 2009 and 2010, both assets rallied. Equity prices were propelled by cheap valuations and rebounding earnings while gold was driven by anticipated inflation that failed to materialize. By 2012, the party was over for gold, while equities jumped 33% in 2013 and a bull market continued for the next 7 years.
Fast forward to February 2020 and Cuggino says fearful investors started throwing both asset classes out the window. Since late March they have rallied, though not exactly in lockstep.
As investors realized stocks were “oversold,” the fastest, most powerful equity rebound in modern history began—the S&P 500 is up more than 50% from its March 24 low. The rally has been driven by a handful of giant companies and start-ups with businesses tied to remote work.
Gold is somewhat different, more complicated story, as Cuggino explains. The precious metal, which is up more than 20% from its March trough, responds to “expectations or belief in future inflation,” he adds. Equities can also be a beneficiary of modest inflation, though not the runaway 1970s variant of it.
There is little doubt that all the liquidity provided by the Federal Reserve and Congress has driven up the prices of financial assets, as well as housing in certain areas. But the debate over whether all this economic shock and stimulus will produce inflation or deflation remains among the most contentious in economics today.
“Real interest rates are negative across the yield curve and they are worse abroad,” Cuggino says. Some respected scholars of interest rates and inflation Like Hoisington Capital’s Lacy Hunt believe a decade of deflation and slow growth looms.